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Last week, I made a bet on the Federal Reserve.
Not a huge bet. And certainly not one I’m suggesting anyone else make. But over the last few months, I’ve started playing around with prediction markets for fun. I also find them fascinating because they force you to put a price on what you believe will happen.
Before last week’s inflation numbers were released, I bought contracts predicting that the Fed would NOT change interest rates at its September meeting. I paid $0.63 per contract. If the Fed does nothing, each contract eventually pays $1.
As I write this, they’re trading around $0.75.
So far, so good.
More importantly, the economic data released last week strengthened an argument I’ve been making for the last couple of months: I don’t believe the Fed will raise interest rates in 2026.
That’s been a somewhat lonely position.
Earlier this summer, Wall Street was increasingly convinced that another rate hike was coming as inflation picked up and the war in the Middle East sent energy prices higher. But the latest numbers suggest inflation isn’t spiraling out of control.
The July Consumer Price Index (CPI) increased 3.4% from a year ago, right in line with expectations and down slightly from 3.5% in June.
Core CPI, which strips out volatile food and energy prices, came in at 2.5%. Then we got an even more encouraging reading on wholesale inflation.
The Producer Price Index (PPI) was unchanged in July and increased 4.7% from a year earlier, below the 4.9% economists expected and down sharply from 5.5% in June.
Are those numbers perfect? No.
The Fed would certainly prefer inflation closer to its 2% target. But that’s not the important question for investors today. The question is whether inflation is accelerating enough that the Fed needs to step in and cool the economy with another rate hike.
I don’t see that in last week’s numbers.
And considering everything the economy has absorbed this year (including an ongoing war in the Middle East and the resulting volatility in energy prices), I think the inflation data was actually pretty encouraging.
The bond market is starting to agree.
According to the latest probabilities from FedWatch, the odds of a 25-basis-point rate hike at the Fed’s September 16 meeting have fallen dramatically. Just a month ago, the market saw roughly a coin flip’s chance of another increase. Now the odds are closer to one in three.
The expectations for the rest of 2026 are shifting as well. The probability that the Fed gets through the end of the year without another rate hike has climbed substantially over the past month.
In other words, Wall Street is slowly moving toward the view I’ve held for months. They’re a step behind… go figure.
I’m sticking with my call: No rate hikes in 2026.
I’ll even go one step further. I still believe there’s a small possibility that the Fed’s next move is a rate cut.
We’re not there yet. Inflation remains too high for me to make a rate cut my base case. But if inflation continues cooling and economic growth or the labor market weakens further, that conversation could change quickly.
This isn’t simply about being right on my prediction-market trade. The direction of interest rates has major implications for the stock market.
One of the biggest reasons I’ve remained so bullish on stocks is that I don’t believe we’re heading into another sustained Fed tightening cycle. If I’m right, an enormous potential headwind disappears.
That’s especially important for rate-sensitive areas of the market.
Biotech is one of my favorites. Smaller biotech companies often rely on outside capital for years while developing drugs and moving them through clinical trials. Higher interest rates increase the cost of that capital and reduce what investors are willing to pay today for profits that may not arrive until years down the road.
When the threat of higher rates begins disappearing, the equation changes.
The same can be true for small caps, emerging technology companies, and other growth stocks whose valuations are particularly sensitive to interest rates.
There will be another CPI report before the Fed meets September 15-16, so nothing is guaranteed. A sudden resurgence in inflation could change the picture again.
But based on what we know today, I see very little in last week’s inflation numbers that would justify another rate hike in September.
And if the Fed stays on the sidelines not only in September, but for the remainder of 2026, it would remove one more obstacle standing in the way of the bull market.
That’s good news for my prediction-market contracts.
But more importantly, it’ll be even better news for our stocks.
